Is this Emerging Markets Rally Going to Last?

It’s been a spectacular week for emerging market currencies with some enormous rallies.

So, buy buy buy? Not so fast.

“Investors should be circumspect about how long emerging market foreign-exchange rally can continue,” said Koon Chow, head of emerging-market strategy at Barclays PLC.

The Brazilian real is up 3.5% this week against the dollar, while the Malaysian ringgit and Turkish lira have notched up gains of 3% and 2.6% respectively.

Behind the moves: The Federal Reserve’s decision Wednesday to keep up its current pace of monetary stimulus. Holding off on unwinding bond purchases ensures the flow of cheap money will continue into emerging markets, helping countries such as Turkey and India to finance their large current account deficits.

But the Fed has merely postponed pulling back on stimulus, not cancelled such a move. As Rabobank puts it “the cat is now out of the bag when it comes to QE” and at some point in the future liquidity will be reduced, whether that’s later this year or early next.

“Although the pushback to tapering has come as welcome relief to high-yielding assets and many emerging market central banks who were struggling to fight currency depreciation…we expect that this respite is likely to prove somewhat temporary,” currency strategists at Rabobank say.